First Quarter 2012

Better than expected

The stock market had a terrific first quarter this year. According to Standard & Poor’s the first quarter market performance of the S&P 500 (+12.6%) was the best in the past 14 years. All of the equity sectors had a positive performance. The bond market had a discouraging result with the US Treasury Bond Market index losing money (-1.3%), while at the same time, the best performing bond index was the Emerging Market Bond index (+5.5%). This is an example of a “risk on” market, where you get better performance by taking more risk..

Our view was very cautious going into the quarter. We were concerned about the US economy performing well. There seems to be continuous doubts about the world markets, and there is some truth to those negative assumptions.

Today, the markets view of the world has changed. Stock prices are anchored on strong profits, so investors are concerned about the sustainability of those profits. The concern being that if profits fall, stock prices will follow a downward trend. We believe and have read continuously about how corporate profits will remain strong into the near future. As we know the stock and bond market doesn’t operate in an economic vacuum, so hopefully the economy will continue its modest recovery.

The investment process we follow has kept us looking at small cap stocks indexes, International REIT’s indexes, and Germany, China, and Canadian ETF’s. We are going to move cautiously into more equities (the better performing sectors) which would include financials, industrials, and consumer discretionary sectors. Our current strategy does include technology and healthcare investments. Since these investments have been top performers, we will add to those positions.

Every spring for the past three years, Europe seems to hatch another debt crisis. Spain now seems to be the next euro-domino to fall. According to the Bank of Spain, Spanish banks borrowed twice as much in March as in February. The rising yields on bonds in Italy and Spain are causing concern for all investors. (Spain is the fourth largest economy in Europe.) The world seems happy that China (8.1% growth in GDP) can continue to make up some of growth needed to drive the world’s economic engine and keep stock markets around the world headed higher. The real issue for investors about China is their rate of inflation. This cloud could be the undoing of their economy.